Welcome to Bubble Land

“What do you think?” asked an interviewer who reached us by phone yesterday. “Bank of America predicts a big bear market in the second half of the year. Should investors be worried?”

“Of course they should be worried,” we replied. “But they shouldn’t wait until after June. They should be worried now.”

All News Is Fake News

But before we go on, we warn readers…

As we were speaking, a thought crossed our mind, like a surfer disappearing into the foam. There is not much “truth” to what we had to say. Not that we said anything we didn’t believe… and not that what we said was incorrect…

…but truth is a different matter…

It presumes real knowledge, not just guesswork and suppositions.

All the news in economics is fake news. As for the facts, we don’t believe any of them, unless we made them up ourselves. And the more you are sure that you are right, the more you are doomed.

In economic forecasting, certainty varies proportionally with ignorance: Find someone who knows what will happen and say hello to a moron.

While we’re at it, we’ll give you another principle: Truth diminishes by the square of the distance from it, the time elapsed since it happened, and the scope of it.

The farther you are from an event… the earlier it happened…. and the bigger it was… the less you really know about it. This is important for real investors. It explains why investing from news reports is a losing proposition.

On the other hand, you can gain an advantage by getting very close to the companies you own. (More to come…)

Bubble Land

We continued our interview…

“Markets don’t operate on a timetable. They go up. They go down. When they are near record highs… the best bet is that they will be lower in the near future. When they are near record lows, the best bet is that they will soon be lower.

“The feds have been pushing credit into the markets for the last 30 years. As we get more and more of it – like a guy with a drinking problem – the markets start swaying. They become incoherent, volatile… and unreliable.

“In the last three decades, we’ve seen three 1929-style highs. The first was in 1999 with the dot-com bubble… the second was in 2007 with the bubble in housing and finance. Now we have another bubble spread over several sectors: student debt, auto debt, some housing debt (they’re building $100 million spec houses again)… and tech stocks.

“Just like 1999, we’re seeing another tech bubble, with just the four leading stocks – the ‘FANGs’ (Facebook, Amazon, Netflix, and Google) – worth more than $1.5 trillion. These prices only make sense in a bubble. Earnings will never catch up.

“And guess what? These stocks represent half of the entire gain from the stock market over the last year.

“Yes, we’re in Bubble Land. And bubbles are always on the lookout for a pin.

“In the next few weeks, there will be plenty of them.

“First, they’ll brush up against a debt ceiling. Then, we’re going to see a fierce and nasty argument about medical care in the U.S. The Republican majority is probably going to break into factions, thanks to the deep contradictions between Trump, the conservatives, and the party hacks.

“There is also the Fed’s rate hike coming up. And the tax cuts – which were supposed to light a fire under the economy – will most likely be extinguished by partisan swamp fighting… and a ballooning deficit.”

Here Comes QE4

“Hey, I thought Trump’s first order of business was to drain the swamp,” came the follow-up question. “What happened to that?”

“Not going to happen,” we replied. “That is only something you could do if you could get the entire nation behind you… right at the beginning.

“You’d have to move fast, keep the insiders off-balance, and speak directly to the people about things that really matter. You’d have to go on TV… something similar to de Gaulle’s famous 1961 speech.

“A coup by a quartet of retired generals began in Algeria. De Gaulle got wind of it, put on his uniform (he was in his 70s and had been retired from the army for many years), and went on TV.

“He explained the threat… appealed to the French to help him protect la République… and the traitors were arrested. The coup was over.

“Team Trump might have pulled off a similar feat in January or February. But the opportunity for real change was squandered with silly tweets. And that assumes they even wanted to do such a thing, which is unlikely.

“Now, here’s what will happen. Sooner or later – in the first half or the second – one of these pins is going to connect with the bubble. For the third time this century, the stock market is going to fall… hard. This time will be worse than it was before… because the economy is much weaker and there’s much more debt.

“GDP growth, for example, has been running at less than half the rate it was before the 2000 crash. Federal debt is three times as high. The 10-year Treasury note yielded more than 6% back then. Now businesses have gotten used to less than 1%.

“Corporate earnings were growing at over 7% per year back then. Now they’re falling.

“This next crisis has the makings of a real doozy. We could see U.S. Treasury yields go negative as people rush for safety. And we’ll see stocks crash to half their prices today.

“And we know what the feds will do, too. They’ll come in with QE4 and a bunch of other measures to try to trick up the market.”

True? Not a word. Right? Maybe.

Regards,

Bill

Market Insight

BY CHRIS LOWE, EDITOR AT LARGE, Bonner & partners

Is a bear market in bonds about to begin?

Storied bond fund manager Bill Gross reckons that a 2.6% yield on the 10-year Treasury note is the key to everything this year.

More important than the Dow at 20,000… more important than $60 oil… and more important than whether the euro reaches parity with the dollar.

Gross says that if the 10-year T-note yield rises above 2.6% (meaning bond prices are falling), it will signal the start of a secular bear market in bonds.

And as you can see from today’s chart, with the yield at writing at 2.56%, we’re nearing that line in the sand.

– Chris Lowe

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Mailbag

Bill touched on the third rail of U.S. politics in yesterday’s Diary – health care. And it’s gotten one reader thinking…

Bill, I love your letters. I don’t always agree with them, but I love your storytelling way of sharing an opinion. I have to pipe in on one point – everyone’s favorite topic, healthcare.

Being Canadian, I couldn’t imagine living in a country without publically supported healthcare. I’ll go so far as to say that you can’t really be a first-world country without it. It is a deep part of what defines most Canadians. (You’d find most people in Canada would support this.)

I’m pretty conservative fiscally, but the society I want to live in looks after its sick (and its elderly). Depending what you earn, health care in Canada costs nothing (paid by taxes) for low income earners, roughly $8000 (average incomes), or roughly $37,000 for high income earners. (This was me much of my life, and I never begrudged a penny of it.)

If the U.S. is spending $16,000 a year [the figure is as high as $25,000] on average right now, you have to already be spending the same as Canadians.

I support public healthcare, but I don’t agree with how U.S. governments have been trying to implement it. Dump your current system completely, and take on the Canadian, French, British, or Australian system. They all vary – find one that fits, and do it. You will piss off a lot of doctors, and lawyers, and hospital boards, and administrators. Too bad. It’s time the U.S. to get serious about medical reform. Once you’ve done that, help all of us retune the medical system so that we can all find savings, because it is expensive as it is.

The U.S. does not need to recreate the wheel. But their assistance in improving it would be appreciated by everyone. I hope that your mom is doing as good as can be expected. Love and prayers from the Great White North.